The ADCF Policy: The “Auto Dealer Operations” Trigger

By Greg Johnson. In previous posts, I’ve discussed the new Auto Dealers Coverage Form (“ADCF”) policy (“The Comprehensive Guide to the 2013 Auto Dealer’s Coverage Form”), which replaced the Garage Liability form in 2013.

This article addresses the insuring clause requirement that the accident arise out of “auto dealer operations” (“garage operations” under the former GL policy). The ADCF policy replaces the Garage Liability (“GL”) policy.  Unlike most commercial policies, the ADCF policy is, as its name suggests, is specifically tailored to meet the insuring needs of a particular industry, automobile retail dealerships.  Today, franchised auto dealers operate three discreet businesses: vehicle sales, vehicle servicing and vehicle financing. Because of the significant variation in liability risks flowing from an auto dealer’s businesses, the ADCF policy, like the predecessor GL policy, rolls several different coverage forms into one. “The automobile garage policy affords coverage for many hazards which would ordinarily be covered by separate policies.” 1 R. Long, The Law of Liability Insurance, Sec. 7.07 (1966). The ADCF policy includes liability coverage parts that are similar to those found in a Business Auto policy, Commercial General Liability policy, Personal Injury & Advertising policy and Professional Liability policy.  There is coverage for auto, coverage for premises and coverage for operations.  In addition, the ADCF policy now includes optional “acts, errors or omissions” coverage which insures the dealership against liability for truth-in-lending, truth-in-leasing, odometer disclosure, title work and insurance agent activities. Historically, all of the liability coverages afforded under an auto dealer policy have been based on, and restricted to, liability arising out of “garage operations.”

The ADCF policy uses the term “auto dealer operations,” which is defined to mean “the ownership, maintenance or use of locations for an ‘auto’ dealership and that portion of the roads or other accesses that adjoin these locations [and] also include[s] all operations necessary or incidental to an ‘auto’ dealership.” For some unknown reason, the ADCF policy no longer limits auto coverage to “auto dealer operations.” The “operations” requirement rarely comes into play, but does serve as an outer-limit on coverage and confine it to activities which have some causal nexus to sales, servicing or financing activities. There “must be some nexus between the insured’s business and the act or occurrence at issue.” Cotton v. Auto-Owners Ins. Co., 937 N.E.2d 414, 414-19 (Ind. Ct. App. 2010). The “policy here does not insure gratuitous conduct unrelated to garage operations.” Id. However, the causal nexus is rather easily satisfied as demonstrated by the Minnesota Court of Appeals decision in American Hardware Mut. Ins. Co. v. Darv’s Motor Sports, Inc., 427 N.W.2d 715 (Minn. Ct. App. 1988). In that case, Darv’s Motor Sports, Inc. (DMS) was involved in selling and repairing motorcycles. The company was owned and operated by Darvin and Kathleen Sembauer. The Sembauers taught their five year old daughter, Jill, how to ride a Yamaha Y-Zinger, a motorized dirt bike. Jill was injured while operating the dirt bike when she collided with a motorcycle operated by Thomas Boran on a driveway next to the Sembauer home. Boran, who was 26 and employed by DMS as a mechanic, was test-driving a Kawasaki motorcycle under repair. Jill was on her way to visit a friend when the accident occurred.

Jill’s guardian-ad-litem brought a negligence action on against Boran and DMS. At the time of the accident, DMS was insured by American Hardware under a garage policy. The liability coverage provided that American Hardware would defend suits and pay all sums the insured legally must pay because of bodily injury covered by an accident and “resulting from garage operations.” The term “garage operations” was defined to mean “the ownership, maintenance or use of locations for garage business and that portion of the roads or other accesses that adjoin these locations. Garage operations includes the ownership, maintenance or use of the autos * * * as covered autos. Garage operations also include all operations necessary or incidental to a garage business.” Although the accident did not occur on the business premises and Jill was on her way to visit a friend when the accident occurred, DMS argued that Jill was nonetheless operating the Y-Zinger (which was owned by DMS and offered for sale by DMS) for “promotional purposes” and her use of the bike on that day was “incidental” to garage operations. The trial court, affirmed by the appellate court, agreed:

There can be no doubt Jill Sembauer’s activities, on this day, fell within the broad Garage Operations definition. Garage operations include all operations necessary or incidental to the garage business. One important activity which is necessary and incidental to Darv’s Motor Sports Inc. was the promotion and sale of its products. One of these products was the Y-Zinger. The Y-Zinger was designed to be driven by younger children. Darv’s demonstrated to potential customers that a young child is capable of riding the Y-Zinger. And for that purpose, Jill Sembauer was trained in its use and proficiency. She fit the business needs of Darv’s Motor Sports. Jill was given expressed authorization to practice driving the Y-Zinger * * * even though she may be using the vehicle for personal or social purposes. It certainly is reasonable, under the circumstances of this case, that the more Jill drove the motorbike, for whatever reason, the more proficient she would become in its operation and handling characteristics. In fact, it certainly inures to Darv’s benefit to have Jill ride the bike as much as practically possible to become extremely proficient in its operation to show potential customers how skillful she was in handling the bike to demonstrate its versatility and ease of handling. The more proficient she was in showing potential customers its versatility and ease of handling, the greater sales potential for the bike.         

Generally, the “operations” requirement will be satisfied if the vehicle involved in the accident had been previously used in the dealer’s operations, or the accident occurred on or near the business premises or the accident was caused by an employee acting within the scope of employment. As to vehicles previously used in garage operations, see Farmers Alliance Mut. Ins. Co. v. Ho, 68 P.3d 546 (2002) (accident was covered where car involved in the accident had been left by a customer for service or repair despite fact that garage owner used the car for personal reasons after hours, became intoxicated and caused the accident); Northland Ins. Co. v. Boise’s Best Autos & Repairs, 132 Idaho 228, 229 (1997) (accident arose out of garage operations where truck involved in the accident was owned by the garage, accident occurred while the truck was being used to deliver advertising materials to a related business, a pawn shop that provided the garage with all of its vehicles for sale); American Hardware Mut. v. Darv’s Motor Sports, 427 N.W.2d 715, 717-718 (Minn. Ct. App. 1988) (case discussed above); Providence Washington Ins. Co. v. Glens Falls Ins. Co., 114 N.J.Super. 350, 352 (1971) (car involved in the accident was left for spot painting; the garage owner used it for a personal errand and caused the accident); Rivas v. Killins, 346 S.W.2d 698, 699, 700 (1961) (car involved in the accident was owned by the used auto agency and loaned indefinitely to a prospective purchaser; the accident occurred while the borrower was driving for personal reasons). But see, Peirson v. Insurance Co., 249 N.C. 580, 107 S.E.2d 137 (1959) (even though vehicle was used occasionally in garage business, there was no coverage under garage policy for garage owner’s use of vehicle to attend unrelated social function).

Accidents that occur on the business premises will generally satisfy the “operations” requirement because coverage is not restricted to defective conditions on the premises. In Knowles v. Lumbermens Casualty Company, 69 R.I. 309, 33 A.2d 185 (1943), the court noted the phrase “ownership, maintenance, occupation or use of the premises” for garage purposes was not modified by the phrase “operations necessary or incidental thereto” and, as such, coverage was afforded for an accidental injury arising from the use of the premises even if the “operation” which caused the injury was not necessary and incidental to the conduct of the business.  See also, Linderman v. American Home Assurance Co., 414 So.2d 1124, 1125 (1982) (accident occurred when an employee was balancing the wheels on his personal car and the car sped out of the garage and struck a passing car); Jackson v. Lajaunie, 270 So.2d 859, 861 (1972) (accident occurred when the service station owner fired a pistol at a customer as a practical joke, thinking the pistol was loaded with blank ammunition).  Likewise, accidents that occur within the scope of a dealership employee’s employment for the dealership generally satisfy the “operations” requirement.  See e.g., General Accident Ins. Co. v. Safeco Ins. Cos., 314 S.C. 63 (1994) (accident arose out of garage operations when an employee of the garage was driving a rental car while attending a conference because attendance at the conference was a requirement of employment).

However, when none of the three factors outlined above are present, the auto dealer policy will likely not afford coverage. In Fid. & Guar. Ins. Co. v. German Motors Corp., 2007 WL 2965608 (Cal. Ct. App. Oct. 11, 2007), the insurer had no duty to defend and indemnify its insured dealership for liability arising from a car accident caused by an employee driving a rental car he had rented from a related car rental business.  The vehicle had never been used in dealership operations, the accident did not occur on business premises and the employee was not acting within scope of employment when he drove the vehicle.

In addition, some activities are wholly unrelated to dealer “operations” – the risks insured by the policy – and, thus, are not covered.  See e.g., North Carolina Farm Bureau Mutual Ins. Co. v. Weaver, 517 S.E.2d 381 (N.C. App. 1999) (repossessing vehicles without a legal right; “we conclude that since defendants had available legal remedies, but instead attempted to repossess the Camaro by means not authorized by law, defendants’ actions were not ‘necessary or incidental’ to the ‘garage operations’”); Automobile Underwriters, Inc. v. Hitch, 169 Ind. App. 453, 349 N.E.2d 271 (1976) (selling shotgun shells out of a service station; court held that “sale of reloaded shotgun shells was not necessary or incidental to the maintenance or use of the premises for the purpose of a garage”); McLeod v. Nationwide Mutual Insurance Co., 115 N.C. App. 283, 444 S.E.2d 487 (1994) (affixing dealership license tags to personal vehicles; accident did not result from “garage operations” where dealership permitted an employee to affix dealership license tags to his personal vehicle and the employee, in turn, permitted another person to operate his vehicle); Cotton v. Auto-Owners Ins. Co., 937 N.E.2d 414, 414-19 (Ind. Ct. App. 2010) (policy did not afford coverage where dealer provided a temporary license plate for use on a vehicle it did not own and vehicle was not used in dealership business).

Mr. Johnson grew up in the automobile industry. His father owned an American Motors-Jeep-Chrysler dealership in Rapid City, South Dakota. He has represented auto dealers and auto dealer insurers in insurance coverage disputes and defended consumer finance litigation under the TILA, CLA, ECOA, FCRA, MMWA, FOA, MVRISA, UCC, DTPA and CFA for over 20 years. He defended all 542 Minnesota dealerships in litigation with the Minnesota Attorney General and has served as lead counsel and as a consultant to dealers and insurers on class-action litigation outside of Minnesota.

This blog is for informational purposes only.  By reading it, no attorney-client relationship is formed.  The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2010.

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1 Response to The ADCF Policy: The “Auto Dealer Operations” Trigger

  1. Pingback: The Auto Dealer Liability Policy: Analyzing Coverage for Statutory Acts, Errors or Omissions Claims (TILA, CLA, FCRA, ECOA, FTC, GLB, CFA & UDTPA) | The Insurance Coverage Blog by Gregory J. Johnson Esq.

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